Export Potential of SMEs and Euro Adoption in the Czech Republic

Abstract

1. Introduction The Czech Republic is currently one of Members States with a derogation relating to euro adoption. Each member state may, at its discretion, set euro area accession date. What have official visions relating to Euro adoption been in Czech Republic so far? The draft strategy for euro area accession of 2002 talks about preparations so as to rule out year of 2007. The Government-approved Accession strategy of 2003 mentions period of 2009-2010 that was later specified to 1 January 2010. In October 2006, Government of Czech Republic decided to annul original plan of euro area accession in 2010. The new date has not been set, not even in Updated Strategy of 2007. The existing debt crisis of certain euro area member states leads to scepticism in respect of single European currency. This results in a cautious position of euro area non-member states with regard to replacement of their respective national currencies with euro. Marsh (2011) indicates causes of distrust are the pressures on EMU's existing membership (p. 4) and concludes that the enlargement of euro area has more or less ground to a halt (p. 288). The euro area enlargement is not very likely in near future. However, by joining European Union in 2004, Czech Republic automatically undertook to take part in third stage of formation of Economic and Monetary Union as well--i.e. to accept a single European currency. The commitment to adopt (sooner or later) euro still remains. The objective of this essay is to explore, what impact may be expected from euro adoption on exports of small and medium sized enterprises (SMEs 2). The first part mainly explains general impact of a common currency adoption on exports of companies (trade and its component, Rose Effect). The second part specifically addresses SMEs in Czech Republic. The essay relies on existing literature dedicated to expected impacts of a monetary union accession. With regard to general theoretical literature, this namely concerns Baldwin, Wyplosz (2006) and De Grauwe (2007). The effects of a single currency on mutual trade of monetary union members are discussed in a number of papers. The primary one is study entitled One Market, One Money (Commission, 1990). Furthermore, it namely concerns working papers of European Central Bank (e.g. Mongelli, Vega, 2006). The consequences of ten years of euro existence are summed up in European Commission study EMU@10 (EC, 2008). The expected impacts of monetary integration on Czech companies are namely discussed in analysis of Ministry of Industry and Trade (2006) and Lacina et al. (2008). 2. Impact of Single Currency Introduction on Exports One of expected benefit of a single currency adoption will be stimulation effect on international trade (so-called trade effect): [...] we review recent empirical research and endorse two conclusions: monetary do promote trade between their members but do not reduce bilateral trade between their member states and countries outside such unions (Begg et al., 2003, p. 5). Utilization of euro instead of existing national currency brings about two changes in foreign trade within trade with euro area (see De Grauwe, 2007, p. 77): 1) Certain transaction costs are eliminated, especially those associated with foreign currency management--e.g. conversion of foreign currencies, increased payment system costs associated with use of foreign currencies, costs associated with administration of other accounts (i.e. foreign exchange accounts), costs arising from more complex bookkeeping of foreign currencies, etc. The disappearance of aforementioned costs promotes competitiveness and stimulates exports. 2) The exchange rate risk and costs associated with mitigation thereof disappear. …